A Client Has Recently Learned of a Proposed Tax Bill

question 63

Essay

A client has recently learned of a proposed tax bill that would increase the tax rates on investment gains by 5 percent. The president does not support this increase. Please describe for your client the process by which new tax legislation is created and how the president's disapproval may influence the enactment of the bill.

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Definitions:

Modified Duration

Modified Duration measures the sensitivity of the price of a bond or other debt instrument to a change in interest rates, indicating the percentage change in price for a parallel shift in rates.

Modified Duration

A measure of the sensitivity of a bond's or bond portfolio's price to changes in interest rates, adjusting for the changing yield to maturity.

Market Yield

The current yield of a bond or other fixed-income security, calculated by dividing the annual interest income by the current market price.

Par-Value

The face value of a bond or stock as stated by the issuer, which is typically the amount repaid at maturity for bonds.